Cracks in Labor Market Support Treasuries
December 6, 2023
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–Rate futures stubbornly bid yesterday, sparked by a new yearly low in JOLTs at 8733k (expected 9300). ISM Services a bit stronger than expected at 52.7, but the employment component fell to 50.7 vs 51.4 last. This morning ADP is released, expected 130k. Unit Labor Costs projected -0.9 from -0.8. Payrolls on Friday.
–The block buyer of SFRU4 from last Wednesday took advantage of yesterday’s rally to exit. SFRU4 settled 9564.5, up 6 on the day, while open interest fell 93.8k contracts. New lows once again in near 1-year calendars: SFRZ3/Z4 dropped 7.75 to -137.25 (9462.25/9599.6) and SFRH4/H5 fell 6.5 to -139.5 (9489.5/9629.0). The ten year yield fell by 12 bps to 4.169%. This area is almost the exact midpoint of the year’s yield range. Anything can happen going into employment but I would think this is the area to set shorts in TY. Attached is 10y breakeven, which posted a new recent low 217.7.
–A few interesting trades in SOFR options; Buyer of 20k each SFRH4 9600c at 3.5 (3.75s) and 9575c at 4.75 (4.75s). Both appear new from open interest. Also a new buyer of 15k 2QM4 9700/9850cs vs selling the same in 3QM; paid 3.5 to 4.0. Underlying contracts are M6 and M7 which settled 9658 and 9648.5. Expiration is 14-June 2024. On aggressive easing, the back end of the SOFR curve will steepen, at least that’s the rationale for this trade. Described slightly more in this tweet:
https://twitter.com/AlexManzara/status/1732135093685088451
